# OPTIONS EDUCATION GLOBAL

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1 OPTIONS EDUCATION GLOBAL

8 ITM, ATM AND OTM IN THE MONEY (ITM) A call option is in the money if the market price of the base currency is greater than the option s strike price. A put option is in the money if the market price of the base currency is less than the option s strike price. Price OTM CALLS ITM PUTS Current Value AT THE MONEY (ATM) A call option is at the money if the price of the base currency is equal or closest to the options strike price. A put option is at the money if the base currency is equal or closest to the options strike price. OUT OF THE MONEY (OTM) A call option is out of the money if the option s strike price is greater than the market price of the base currency. A put option is out of the money if the option s strike price is less than the market price of the base currency. WHAT HAPPENS WHEN MY OPTION EXPIRES? OTM PUTS ITM CALLS Time A call option is in the money if the market price of the base currency is greater than the option s strike price. A put option is in the money if the market price of the base currency is less than the option s strike price. If, at the time a call expires, the base/quote spot price is above the option s strike price, then the option has a positive payoff: Call Payoff = Spot Price Strike Price If, at the time a put expires, the base/quote spot price is below the option s strike price, then the option has a positive payoff: Put Payoff = Strike Price Spot Price If an option expires with a positive payoff, then the holder may either exercise the option or accept a cash settlement. If the holder exercises a call, he or she buys the underlying currency from the writer at the call s strike price. If the holder exercises a put, he or she sells the underlying currency to the writer at the put s strike price. If the option has a positive payoff and the option settles in cash, then the holder receives from the writer a cash settlement: Cash Settlement = Payoff x Contract Size OPTIONS EDUCATION 8

10 GLOSSARY

11 OPTIONS GLOSSARY Ask: The price at which the spot market or an option can be bought. Same as an offer. Assignment: The process of turning a short option into a spot position. At the Money: This term refers to an option whose strike price is equal to the current spot market price. Base Currency: In a cross rate or currency pair, the currency that remains constant when determining the price. The base currency appears fi rst in a currency pair symbol. Basis Point: The standard unit used to describe the change in an option s value. For example, 1 basis point (0.01%) is equal to 1 pip in spot FX. Bearish: This term is used to describe a market sentiment that the price of a commodity will fall. Bear Spread: This options strategy is executed by buying an option with a higher strike and selling an option with a lower strike. The options can either both be calls or both puts, but they must have the same expiration. Bid: The price at which the spot market or an option can be sold. Breakeven: The market price at which a position earns neither a profi t nor loss. Bullish: This term is used to describe a market sentiment that the price of a commodity will rise. Bull Spread: This options strategy is executed by buying an option with a lower strike and selling an option with a higher strike. The options can either both be calls or both puts, but they must have the same expiration. Calendar Spread: This options strategy is executed by selling an option with a shorter expiration and buying an option with a longer expiration. The options can either both be calls or both puts, but they must have the same strike price. OPTIONS EDUCATION 11

13 Intrinsic Value: The profi t that would result if an option were immediately exercised. It is also the amount that an option is in the money. For call options, the intrinsic value is equal to zero, or the spot price minus the strike price, whichever is greater. For put options, the intrinsic value is equal to zero, or the strike price minus the spot price, whichever is greater. Limit Order: An order to buy or sell at a specifi c price (limit), or at a price that is more benefi cial to the trader. Long: This term refers to an inventory of spot positions and/or options that have been bought. Margin: The amount of capital that must be allocated toward offsetting the risk associated with a position. Market Order: An order to buy at the current bid price or sell at the current ask price. Naked: This term refers to a short option position that is not covered. Near the Money: This term refers to an option whose strike price is nearly equal to the current spot market price. Offer: The price at which the spot market or an option can be bought. Same as an ask. Offset: A trade that liquidates a current position. Option: A fi nancial instrument that allows the owner the right to buy or sell a quantity of a spot market at a specifi c price within a specifi c time. Order: An instruction to buy or sell the spot market or an option. Out of the Money: This term refers to an option that has no intrinsic value. Call options are out of the money if the spot price is less than the strike price. Put options are out of the money if the spot price is greater than the strike price. Pip: The smallest increment that a spot market price can change. Premium: The price of an option. Psi: The amount that an option s price changes for a 1% (i.e., from 2% to 3%) change in the foreign interest rate if all other market factors remain constant. Put (Option): A fi nancial instrument that allows the owner the right to sell a quantity of a spot market at a specifi c price within a specifi c time. OPTIONS EDUCATION 13

15 Theta: The amount an option s value will change over time if all other market factors remain constant. Time Value: The amount of an option s value that is in excess of intrinsic value. Type: The classifi cation of an option, defi ned as either an option to buy (call) or an option to sell (put). Vega: The amount that an option s price changes for a 1% (i.e., from 12% to 13%) change in volatility if all other market factors remain constant. Vertical Spread: An option strategy executed by buying and selling options with different strikes but the same expiration. Volatility: A measure of the variation in the spot price. Write (an Option): To sell an option. OPTIONS EDUCATION 15

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